Legal Tax Benefits for Your Small Business at Year’s End

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Many people see the IRS as an entity that only seeks to take away their hard-earned cash. But, think of it this way. In a game of basketball, is the other team just going to let you win? No, but most teams will play fair, meaning you have an opportunity to score, just as they do. It’s the same with the IRS. Of course the IRS is going be aggressive in making sure you pay what you owe; however, it also expects you to play just as hard by making sure you receive the money owed to you.

5 Smart Tax Moves

The amount of potential savings is going to vary depending upon your company’s cash flow and its need for supplies and equipment. By playing the game correctly, you could save your business thousands in taxes. What you need is a smart strategy that can be implemented easily and safely, so check out these 5 tips for immediate savings:

  1. Stop Billing at the End of the YearIf your business operation is based on the calendar year, simply don’t send out invoices in November and December. Wait, instead, to request payment for those services at the beginning of January. With no invoice, insurance companies or customers are unlikely to send payment, which means less taxable income on your return. By waiting to bill, you’ve postponed those taxes.
  1. Purchase Office EquipmentAfter much anxious waiting from taxpayers in 2014, the IRS raised Section 179 expensing back to $500,000, as it had been in previous years. Unfortunately, the smaller $25,000 cap has been reinstated for 2015[1]. However, the limit in 2014 was not raised until nearly the end of the year, so pay attention towards the end of the year to see if the limit is raised again. If so, it will pay to go forward with equipment purchases rather than waiting.
  1. Pay Expenses in AdvanceYou have the IRS tax-deduction safe harbors to thank for this advantage. According to IRS Regulation 1.263(a)-4(f), cash-basis taxpayers can deduct qualifying expenses up to twelve months in advance[2]. Here’s an example of how it works. Let’s say you pay $2,000 per month in office space rent. To immediately get a $24,000 deduction, on December 31st you just send a check for the entire payment for the next twelve months.

What happens is you get the deduction in the year you paid the money (not the year the money is due). Your landlord, however, does not have to report the payment until the following year since it was not received by mail until January. To prove that you mailed the check in the current tax year (and remember, the IRS always requires proof!), you can send the check certified or by registered mail so that you get a dated receipt.

Tip: Make sure your landlord understands what you are doing. You don’t want this strategy derailed because the landlord thinks it’s an error and your check is returned. Also, don’t send payment too early. Your landlord will not be happy to receive the check before January 1st and have to claim the full amount on the current tax return.

Remember, you can pay expenses for the upcoming tax year in advance, but no further out than that. That means you could not pay two years, or even eighteen months, of expenses in advance. Qualifying expenses for cash-basis taxpayers include office and machinery rent payments, business and malpractice insurance premiums, lease payments for business vehicles, and others.

  1. Pay with Credit CardsFor sole proprietors, expenses are deductible as of the day they are charged to their card. This method allows for immediate deductions of office supplies and other business necessities, and it has the advantage of proof in the form of your credit card statement. For those who own a corporation, this advice works in the same way as long as you have a credit card under your corporation’s name. However, if the card is in your personal name, the expenses are not eligible for deduction until you submit your expense report and the company reimburses you, so plan accordingly.
  1. Don’t Worry that You’re Taking Too Many Deductions—As long as you’re following the rules, you have no reason to hold back on your deductions. A great basketball player doesn’t hold back for fear of scoring too many shots. It is possible that your business deductions exceed your business income. When this happens, it’s called a “net operating loss” (NOL)[3].

Fortunately for you, in the case of NOL tax law allows you to claim refunds from as far back as the previous two tax years[4]. So, you may actually get back money you previously paid in taxes! Not only that, but if you still have unused losses after going back two years, you can carry those losses forward for up to twenty years[5]. That’s an astounding twenty-two year window during which you can benefit from the deductions made in one year, and it works that way no matter how you run your business (proprietorship, corporation, or other methods)[6].

Now that you understand just how much of an effect your deductions can have on your lasting tax benefits, you know to make those deductions count. Don’t avoid deductions for fear of a tax loss. Just because you have an NOL on your return does not mean your business is not thriving and successful. More deductions mean less regular tax paid and less AMT tax paid. So, keep documenting those deductions!

  1. IRC Section 179(b)(1)(B).
  2. IRS Reg. 1.263(a)-4(f).
  3. IRC Section 172(d).
  4. IRC Section 172(b)(1)(A)(i).
  5. IRC Section 172(b)(1)(A)(ii).
  6. IRC Sections 172; 642(d); 512(b)(6).